What is index concentration?

Index concentration describes how much of a stock index is made up of its largest companies. Because broad indices are weighted by market value, the biggest companies automatically receive the biggest weights. When a small group of companies grows much faster than the rest — as the largest US technology companies have in recent years — the index, and every fund that tracks it, becomes more concentrated.

How it is measured

Top-10 weight: the combined share of the ten largest companies:

\text{Top-10 weight} = \sum_{i=1}^{10} w_{(i)}

where $w_{(1)} \ge w_{(2)} \ge \dots$ are the weights sorted from largest to smallest.

Effective number of companies: the inverse of the sum of the squared weights, which says how many equally weighted companies the index behaves like:

N_{\text{eff}} = \frac{1}{\sum_i w_i^2}

How concentrated indices are

In the mid-2020s, the ten largest companies made up around a quarter of the MSCI World and more than a third of the S&P 500 — levels not seen for decades. Most of them were US technology and communication companies. An index of around 1,400 companies therefore behaves, for a large part of its risk, like a portfolio of a few dozen.

A simple illustration

An index of 1,000 companies in which the ten largest weigh 3% each, and the other 990 share the remaining 70% equally:

N_{\text{eff}} = \frac{1}{10 \times 0.03^2 + 990 \times \left(\frac{0.70}{990}\right)^2} \approx \frac{1}{0.0090 + 0.0005} \approx 105

The index holds 1,000 companies but behaves like about 105 equal ones, and the ten largest account for almost all of the concentration.

What it means for investors

World ETFs are less diversified than they look. A large share of their performance depends on a few companies, one sector and one country.
It works both ways. Concentration lifted index returns while the largest companies outperformed; it would hurt if they fell together.
Direct shares add to it. Holding the largest companies individually on top of a world ETF increases an exposure that is already large.

Ways to respond

Accept it as the market's own judgement: market-cap weighting simply reflects what companies are worth, and it needs no trading to maintain.
Add counterweights, such as small-cap, equal-weight or regional funds that hold less of the largest companies.
Measure the combined exposure to the largest companies across all holdings, so the concentration is a known choice rather than a surprise.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

What is my exposure to US mega-cap tech?

Your exposure to US mega-cap tech is 28.310,21 €, which is 20,37% of your portfolio. This figure comes from the look‑through analysis and covers 29,55% of your holdings, so it reflects only the portion we could map across your funds and positions.

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